Canada and the United States are on the brink of yet another softwood lumber war, fuelled by a drastic jump in B.C. lumber exports to the U.S. and growing anti-trade sentiment. American sawmillers say they are ready to fire the first shot in what would be the fifth lumber trade war since the 1980s, if negotiations now underway don’t result in an agreement by Oct. 12, when a one-year standstill on trade action expires.
However, growing anti-trade sentiment is making it harder to reach a deal, Canadian International Trade Minister Chrystia Freeland said over the weekend.
“There is no guarantee we are going to get to a deal that works for both sides,” she said in an interview with Bloomberg Television at the G20 Summit in Hangzhou, China.
With no deal in sight, the influential U.S. Lumber Coalition lobby group has assembled an entire office full of documents against Canada’s lumber industry, which it plans to submit to the U.S. government after Oct. 12. That will likely kick off a chain of events that will result in duties being applied to Canadian lumber by next year.
The American industry wants a firm cap on Canadian exports south of the border, which have been increasing in step with the U.S. housing market recovery. Canadian producers are divided, but all agree that no deal – and the imposition of duties that would follow – is better than a bad deal.
The two countries have been in talks over a softwood deal since the last one, the 2006 Softwood Lumber Agreement, expired Oct. 12, 2015.
The Americans allege Canadian wood is subsidized, but the dispute is really all about market share, said Russ Taylor, president of Wood Markets, a Vancouver-based consulting firm that tracks the lumber industry worldwide. The U.S. does not produce enough lumber to meet all its domestic needs and its construction industry relies on Canada to make up the difference. Five years ago, when U.S. housing starts were down, Canada accounted for 27 per cent of the wood consumed in the U.S. By Aug. 31, its share had grown to 34.5 per cent. More than half that volume comes from B.C.
The U.S. grievances, Taylor said, come down to one thing: as the American housing market recovers and lumber demand picks up, Canada – aided by a low Canadian dollar – is directing more lumber south of the border, scooping up those additional lumber sales.
“If the currency had not changed the way it did, because of the collapse of oil prices, I don’t think we would be having this conversation,” Taylor said.
B.C., which has the largest lumber companies in the country, is a prime target of U.S. discontent. B.C. government stats show that the dollar value of B.C. lumber exported to the U.S. for the first six months of 2016 is up 40 per cent over the same period of 2015, when the Softwood Lumber Agreement was still in effect. B.C. lumber producers alone now account for 22.3 per cent of the dollar value of U.S. lumber consumption, up from 17.2 per cent in 2015.
Susan Yurkovich, president of the B.C. Lumber Trade Council, said there’s a dispute raging now in both countries over which data accurately reflects what is going on in the market.
U.S. data is being questioned by U.S. analysts and B.C.’s dollar-based stats don’t show volumes. Lumber prices have climbed 20 to 25 per cent over the same period, which accounts for much of the B.C. increase, she said.
She also noted that B.C. has been shipping less to the U.S. over the last several years because it has opened up new markets in Asia. Imposing a quota on B.C. producers at this time would disadvantage them as demand is shifting back from China to the U.S.
“We feel pretty strongly that quota is something that distorts the market,” she said.
“We worry about anything that artificially keeps prices higher than they would otherwise be, and what that does in terms of pushing people to substitute products.”
B.C. wants a “soft cap” on exports, such as a tax regime similar to the one agreed to in the former Softwood Lumber Agreement, she said.
Taylor said the gap between both sides does not bode well. The lumber sectors in both nations don’t have any incentive right now to settle, he said, as neither side has enough negotiating leverage to bring the other around.
David Yocis, lead lawyer representing the U.S. Lumber Coalition, said the coalition is ready to file, but he won’t say when.
“We are free to file on Oct. 13,” Yocis said. “If there is no new agreement, sooner or later we will file. We can decide, because we are in control of that, whether it is to our advantage to file immediately, or whether it is to our advantage to wait.”
Yocis said the coalition intends to seek a countervailing duty and an anti-dumping duty on Canadian lumber, as well as seek redress for injury it says the Canadian industry has caused the U.S. sector. In the previous softwood dispute, the U.S. imposed duties totalling 27 per cent. It took five years of litigation by Canada at a cost of more than $100 million to have the duty reduced to zero. By that time, the U.S. had collected US$5.4 billion in duties. Only US$4.4 billion was returned.
Henry Spelter, of the U.S. consulting firm Forest Economic Advisors, said he expects a prolonged legal battle once again.
“Given the increased protectionist political mood in the U.S., those inclined to bet should likely put their money on a new round of litigation,” he said in a recent report.
The softwood dispute is the largest, longest-lasting and most complex trade dispute in the history of Canada-U.S. relations. The first of the four previous trade wars began in 1981 when U.S. producers alleged lumber companies in B.C. were subsidized by the provincial government. Over the 35 years since then, it has cost the Canadian economy jobs and revenue.
Softwood’s ‘circle of hell’
Here’s a brief explanation on why the lumber wars between Canada and the United States have dragged on, and on and on. It comes from Don Wright, who was deputy B.C. forests minister during the last dispute, which began in 2001. Wright, who is now president of Central 1 Credit Union, wrote then that the industries in both countries are trapped in a “circle of hell.”
It starts when U.S. stakeholders notice that for whatever reason – global market forces or increased U.S. demand – Canada’s share of the U.S. lumber business is on the rise. U.S. lumber consumption is increasing but American producers find that they are unable to increase their margins. Their solution? Raise Canadian lumber costs.
They petition the U.S. government to impose duties. The duties curtail Canadian exports and push prices higher in the U.S., making lumber producers there very happy. Their margins increase. But it’s only temporary, because higher lumber prices lead landowners to seek higher timber prices.
After a few years, the U.S. sawmillers again see their costs rising and their margins eroding. They wonder what happened, and look north to Canada, which, because it has more timber, often has lower operating costs.
Their solution? Seek another countervailing duty to raise Canadian costs. The circle of hell continues.